Prescription for the Fund
In their interesting article, “Do Fund-supported adjustment programs retard growth?” (March 1986), Mohsin S. Khan and Malcolm D. Knight hold that devaluation, on balance, exerts an expansionary rather than a contractionary effect on domestic output, even in the short run.
But as a policy instrument for a debt-ridden developing country like the Philippines, currency devaluation may not be appropriate. Philippine exports consist mainly of agricultural raw materials that are substitutable and have relatively inflexible external demand. In such a case, devaluation will aggravate, rather than alleviate, the problems at hand.
Also, how can the Philippines repay its external debt of $26 billion while pursuing its development efforts when about $2.5 billion, or 50 percent, of its export receipts are used for debt service? With another devaluation, the Philippines will be constrained to produce more tradables simply to attain the prior level of export receipts. Devaluation should be resorted to only when other appropriate methods of adjustment—for example, reducing aggregate demand, slowing the rate of inflation, and raising the interest rate—have failed. Better still, why not leave the burden of adjustment to surplus countries for a change?
Fund-supported adjustment programs for debt-ridden developing countries should consider the extent of existing external debt and the possibility of extending a moratorium on debt service until viable balance of payments positions are attained.
Mirto F. Maldo
I wish to congratulate the authors of the World Bank report, “Ensuring Food Security in the Developing World: Issues and Options,” on which Shlomo Reutlinger based his article in Finance & Development (December 1985). I found the article’s approach very enlightening, particularly in that it links food insecurity to low individual and national purchasing power, and explains that although in the short term, food security is linked with redistribution of purchasing power and resources, in the long term it can be achieved by economic growth accompanied by an equitable distribution of the benefits.
On the supranational level, however, there is a tendency to forget the effects of the continuous deterioration of LDC terms of trade; this limits foreign exchange earnings (used for food imports) and constrains the financing of development projects.
With regard to the use of food subsidies to control chronic insecurity, I have personally observed the massive flight of subsidized food to neighboring countries that do not follow the same policy. In the effort to counter transitory insecurity, Mr. Reutlinger states that “countries with access to foreign exchange usually find it cheaper to stabilize prices by varying imports and exports rather than by using buffer stocks.” In practice, however, this approach is hampered by lack of information on food supply (and even demand) in the hinterland of the LDCs.
Juan Rodriguez Rivas
Shlomo Reutlinger replies:
Mr. Rodriguez Rivas is perfectly correct in saying that unfavorable terms of trade make it more difficult for countries to achieve food security. It is incumbent on countries to increase their food production and rate of food self-sufficiency as prices for LDC agricultural exports decline relative to food prices. Food self-sufficiency, however, should not be made into an unqualified objective in the interest of improving food security when comparative advantage in the terms of trade favors less, rather than more, self-sufficiency.
With regard to achieving transitory security, Mr. Rivas is correct in identifying the hinterland’s lack of information about food supply and demand as a problem. This problem, however, is the same whether the national food supply is stabilized through a buffer stock held in a central silo or through varying imports and exports. And to the extent stabilization of the national supply is desirable and feasible, it can often be accomplished at less cost by varying trade rather than by accumulating buffer stocks.
African strengths and weaknesses
In the March 1986 issue of Finance & Development Edward Jaycox observes that “by and large African governments have failed to adjust their economies, and have therefore been overwhelmed by difficulties and decline. It must be noted that this is not because African leaders don’t care or because they don’t know any better.”
No African economist concerned about the development of sub-Saharan Africa can remain unmoved by such a statement. The assertion is a polite thing to say, but it does a disservice to the leaders of the African countries that are facing serious difficulties. It may even weaken the effort to find the real causes of the setbacks. It does not challenge economic and political leaders with the negative results they have achieved. In the absence of sanctions for bad management these countries could easily remain confined to the tunnel of their past errors. More seriously yet, some of these countries may be in danger of putting the implementation of future economic programs in the hands of those who not so very long ago led them into these difficulties. These countries would then be unhappily, and even perpetually, caught up in a fateful economic spiral.
The whole process depends on the democratization of life in these countries. In the 1970s, the general rule was for 15 percent of the skilled Africans to look beyond their borders. The reasons were varied: insecurity, lack of freedom of opinion, unemployment, racial discrimination, lack of jobs requiring their acquired skills, and the inequality between remuneration received by Africans and foreign technical assistance staff.
Ultimately it all depends on the African himself: on his strength, his awareness, his devotion to his country, his obsession to bring his country out of economic underdevelopment. The first concern must be training in the technical and technological areas. The training of skilled Africans calls for a thoroughgoing reform of education.
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